Opportunity for cost reduction

How has the business climate been over the past year in Angola?
On the economic side, it’s been tough year for most businesses operating in Angola due to the uncertainty that elections bring and the under-diversified economy that’s reliant on oil, combined with the lower oil price that has persisted for most of the year. Angola is a high-cost producer and combined with lower oil prices, that has meant income has not necessarily been sufficient for the government’s ambitious infrastructure improvement programmes.
Angola is a resource-rich country where very little investment has happened outside the oil sector to unlock this rich mineral wealth. Thus Angola holds potential for any investor. In 2018, we see another tough economic year but with improvements coming from lower inflation, more foreign currency as result of the higher oil price and lower interest rates. Oil, depending on geopolitical tensions, will trade around USD 50-65 in our opinion, but with a substantial backlog in foreign currency payments, this will be a drag on economic expansion. I see better prospects in 2019, if oil prices stay at current levels.

What steps are companies taking to protect themselves from foreign currency shortages and a potential devaluation?
There is still a lot of speculation about devaluation. The amount of local currency awaiting conversion to foreign currency for payment of imports, services provided, dividends, transfers and so forth is high in relation to foreign currency reserves. Therefore, customers are exposed. There is a limited amount of financial instruments that are available that help protect customers against devaluation. They involve investing in government instruments, which might scare people who are averse to certain types of risk or to the length of tenure. I am referring to government index-linked bonds, where the government carries the currency risk. The popularity of those instruments has increased substantially in 2017.
Where customers have taken a longer-term view, they look at property, thus there’s been some movement of local currency into fixed assets, mainly head offices and residences for employees. The last popular strategy is acquisition of other businesses in Angola, not always related to the current core business, optimistic purchases. With Angola importing most of its products, diversification of the economy is high on government’s to do list, for diversification to succeed foreign currency needs to be allocated into sectors that allow for diversification, which the current allocation of foreign currency does not do.

How can the government improve the investment climate?
Transparency is required in the investment process, combined with clarity of rules. Sustainable economic growth will be achieved by attracting investors into non-oil related sectors such as mining, tourism and agriculture, but clear frameworks for investing in these sectors are needed. Thus the government needs to be more strategic in thinking about the diversification of the economy by focusing on the sector that offers the best return for the country in the defined time period. Monopolies exist in certain sectors, and the government will need to address these sectors to make it attractive to investors while also giving the consumer more choice and better service at a market-related price.
Investment is for many companies a global decision, thus how Angola performs in world investor rankings is important. These rankings set out clearly how each country is seen on a set of key investment criteria and thus are a good guideline to government about what key investment criteria it should focus on to improve the investment climate in country.

Do you believe Angola has seen the reality of what happens in an oil crash and that there is now an impetus to change?
The first realisation in Angola is that the cost of oil production is too high versus competitors and thus the realisation that changes were needed at Sonangol to reduce cost of production.
If Angola can bring the cost of production of oil down, this will have a positive impact on the economy as more foreign currency will be free for the government to use in building infrastructure. We are seeing a more professionally run Sonangol compared to the past with cost-cutting and a review of non-core investments.

Have there been concrete changes in Sonangol over the past year?
Yes. I can’t speak for the oil operators. But from the banking side, I see the restructuring of Sonangol, cost-cutting and better management of people and suppliers as positives. It’s far more transparent with its financial accounts and doing so on a timely basis. A governance framework is taking shape and its interaction with lenders on a regular basis has bridged the gap with management. Sonangol is becoming a better responsible corporate citizen, but only time will tell about the sustainability of these changes.

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